Are there personal loans available for low-income earners?

If you’re on a low income and you need access to a loan – whether it’s for an unexpected expense or an upcoming event – there may be a range of ways you can access credit.

Let’s take a look at the current cost of living situation and what could be available if you’re looking at loan options.

Why is the cost of living rising?

The cost of living refers to the cost of accessing essential goods and services such as rent, groceries and petrol. As the cost of these items increases, low income earners are often the first to feel the impact.

The rise of the cost of these items can be measured by inflation – which is how much the value or cost of an item increases over time. A key metric used to measure inflation is the consumer price index (CPI). CPI measures the cost of items from 11 key categories, and the Australian Bureau of Statistics (ABS) updates this index monthly. According to the ABS, the CPI measures household inflation and includes statistics about price change for categories of household expenditure.

The 11 categories the ABS measures are:

• Food and non-alcoholic beverages
• Alcohol and tobacco
• Clothing and footwear
• Housing
• Furnishings, household equipment and services
• Health
• Transport
• Communication
• Recreation and culture
• Education
• Insurance and financial services.

According to the ABS, the CPI has risen over 6 per cent in the past year, with housing and fuel being the biggest growth areas. This kind of growth in expenses can be stressful if you’re on a low income.

By comparing how much wages have grown against inflation, you can get an idea of how much the cost of living is rising, based on how much Aussies are earning. In recent months, this gap has widened, meaning it’s becoming more expensive to access essential goods and services.

Why is this happening? Throughout the COVID pandemic, the RBA was working in emergency mode, in an attempt to avoid recession. One tool the RBA has to help influence inflation (and deflation) is the cash rate, and they kept this rate at an all time low through much of the pandemic at 0.10 per cent.

While the cash rate is low, it stimulates more household spending, which drives inflation up. The cash rate has had a sharp rise in 2022, and in October hit 2.60 per cent – with expectations it could continue rising for some time. When the cash rate gets higher, it generally leads to lower household spending. What we are seeing now is an attempt from the RBA to address inflation by increasing the cash rate. Other factors that impact the cost of living can be international factors like the cost of oil and other imported goods. Access to these raw materials can drive the cost of items up.

As the cost of living rises, it often impacts low income earners first because they may be living paycheck to paycheck, without the security of a financial buffer to draw on. But there are options available that may be helpful in times of financial stress. If you are struggling with debt, there is a range of services available.

The National Debt Helpline

By calling 1800 007 007 you can get free and confidential advice on how to manage debt with professional financial counsellors. You can visit the National Debt Helpline website for step-by-step guidance on a range of issues like mortgage, bills, credit debt and other common financial problems.

It also offers a live chat feature to help navigate debt related problems anonymously.

The Australian Securities and Investments Commission (ASIC)

ASIC provides a range of resources on their moneysmart website regarding debt management. On the moneysmart website you can access information about:

• How to check your credit score
• Free financial counselling services
• Legal advice in your state or territory
• Making a repayment plan.

Speaking with a trusted friend or family member can also be a helpful course of action when navigating financial difficulty.

Like other forms of credit, a traditional personal loan for low income earners will depend on a few factors:

• Income – Lenders will assess your serviceability of a personal loan based on your income. For low income earners, they will look at your monthly and yearly income to establish what you can afford to pay back. For casual and part-time workers, lenders may be stricter on how much you can borrow because you don’t have guaranteed income like those on a salary. For those who work casually or part-time, some lenders may require a minimum yearly income, such as $30,000. This will depend on the lender, but be aware that lenders without a minimum income limit may charge higher interest on personal loans.
• Assets and savings – If you own a car, property or another asset, or have a large chunk of savings, this may be able to be used as security for a personal loan, and may allow you to borrow more, or secure a lower interest rate on a personal loan.
• Credit score ¬– A credit score is a representation of your trustworthiness as a borrower. If you have repaid loans in the past on time, your credit score will reflect that. If you have failed to meet your repayments on loans in the past, your credit score may be lower. Lenders will assess this when they consider how much money they will lend you. A low credit score may also impact the interest rate you pay. You can learn more about how to check your credit score on the MoneySmart website.

The No Interest Loan Scheme provides individuals and families on low incomes with access to safe, fair and affordable credit. Loan amounts are up to $1500 for essential goods and services such as fridges, washing machines or car repairs.

To be approved for a no interest loan you must:

• Have a Health Care Card, a Pensioner Concession Card or an income less than $45,000 per year after tax
• Have lived at your current address for more than three months
• Show that you can repay the loan.

A no interest loan can be an affordable solution for low income earners to access credit. It may help to cope with the rising cost of living, and avoid paying fees and interest like you would with other personal loans.

Personal loan limits will vary depending on your circumstances and the lender. It will also depend on whether the loan is secured or unsecured.

A secured personal loan is when you attach an asset, like a car or property, to the loan as insurance. If you default on the loan, the lender has the power to sell the asset to get their money back. A secured loan may allow you to borrow more, or offer a lower interest rate, because it is viewed as a less risky loan by lenders.

An unsecured personal loan is a loan with no asset attached, meaning the lender has no backup if you fail to meet your repayments. These loans may come with higher fees and interest rates, or lower limits, because they can mean the lender carries more risk with this type of loan.

A secured personal loan has a form of collateral, because the lender can sell an asset to repay the loan. For low income earners, it may be difficult to offer collateral if you don’t own a property or a car.

In this instance, savings can act as collateral, or you can ask a friend or family member to act as a guarantor on the loan. A guarantor is someone who provides their own income, savings or asset as collateral for the loan.